Agenda item

Responsible Investing Update.


The Committee considered a report of the Director of Corporate Resources, the purpose of which was to update the Committee on progress versus the Responsible Investment Plan 2023, update the Committee on the Fund’s quarterly voting report and stewardship activities, and set out a high-level overview of the Fund’s investment managers net zero approach. A copy of the report marked ‘Agenda Item 10’ is filed with these minutes.


The Chairman welcomed to the meeting Ms. Zina Zelter, a representative of Climate Action Leicester and Leicestershire. Ms. Zelter presented to the Committee the following representation:


“Thank you for allowing me to speak in person today on behalf of Climate Action Leicester and Leicestershire. As a group we have thousands of members locally, hundreds of whom are in your pension scheme, and are supported by dozens of local groups as well as five local councils who’ve passed motions this year calling on you to stop investing in fossil fuel producing companies.


We want to ask you to question the assumptions and beliefs which underpin your approach to responsible investment. We are concerned that some of the assumptions we’ve heard repeatedly in this committee over the past four years, are preventing you from creating real world change when it comes to the carbon emissions of fossil fuel companies - and at the moment these companies produce almost half of the worlds carbon emissions!


As you can see from our paper submission to this meeting, there are several of these assumptions which we’d like you to reconsider, but the one we want to particularly want to raise today is the belief that fossil fuel companies are part of the solution to climate change.


Our question to you is what is the solution you think fossil fuel producing companies offer? Carbon capture and storage is not expected to become a fully functioning technology for at least ten years – but the world must half its carbon emissions within the next ten years in order to stay below 1.5degrees of global heating.


If fossil fuel producers were serious about developing Carbon capture and storage technology, they would be pouring all their capital expenditure into it. Instead, they are deliberately using the idea that it might be a solution to make organisations like this pension fund continue to invest in them, at the same time as spending their capital on opening new reserves of oil and gas.


Obviously we need to continue using oil and gas while the world transitions to net zero. But equally obviously, this oil and gas is already in production. These reserves don’t need investment because they are already operational – and they contain enough fossil fuels to carry the world to net zero.


The only realistic way in which fossil fuel companies can become part of the solution to climate change is by halving their fossil production by 2030. But by putting the vast majority of their capital expenditure into opening new oil and gas reserves instead, they are showing that although they claim to listen to shareholder engagement, they have no intention of doing what is needed within the timeframe necessary. By continuing to invest in and engage with them you are doing exactly what they want. You are providing a fig leaf for their fossil fuel expansion and enabling them to lobby against climate legislation. Which is what they are doing at COP28 right now.


If you want to create real world change which will reduce the risk to this pension scheme and the world from climate change – and again, bear in mind that these few companies currently produce almost half of the worlds carbon emissions – then fossil fuel producers have to be required to change by national and international legislation. The changes companies have made so far, are mainly as a result of the International 2016 Paris agreement to try to keep the world below 1.5oC of heating.


And it is legislation of this nature which can force all fossil fuel companies to reduce their production, which is why they are lobbying so hard against it.


So the question is, what can you as a pension scheme do to encourage international climate legislation and reduce the risk climate change poses to the pension scheme? The answer is to stigmatise the behaviour of fossil fuel producing companies, thereby creating an environment where effective climate legislation is easier to negotiate and enforce. Stop providing a fig leaf for these companies climate wreaking activities, and instead publically remove your support by divesting and encouraging other pension funds to divest. This would have an impact on all fossil fuel producers, not just the ones you invest in and engage with.


We know this approach can work to support climate legislation because Figueres, the lead UN diplomat for the 2010-2016 Paris negotiations said – and I quote - that financial divestment from fossil fuel companies “was a primary driver of success at the Paris Climate Talks”. So the lead negotiator for the Paris agreement – an agreement which has resulted in much of the real world change to date - says divestment effectively supports the creation of International climate legislation.


Which brings me to our final point. Removing fossil fuel producers from your investments can be beneficial for the financial performance of your investments. Even with the war in the Ukraine, both the MCSI and the FTSE indices excluding fossil fuels show better performance than those including them. Your fiduciary duty to the fund does not prevent you ending these investments, and removing the fig leaf which you are currently providing to fossil fuel producing companies. Other pension funds are doing this and you can too.


Please revisit, discuss and consider in depth the assumptions which are preventing you from ending your investments. You have the power to support real world climate legislation instead of supporting the drivers of climate change.”


The Chairman then read out the following statement:


“First, I want to say I know the Committee and I welcome your continued engagement with the Pension Fund on these matters. Undoubtedly, we share a common goal supporting the transition to a carbon neutral world, even if our views on the necessary steps to achieve this differ.


As you are aware these are not clear-cut issues and have been debated at Committee at various stages in the development of the Fund’s Net Zero Climate Strategy. There are several reasons, as have been previously outlined, as to why a comprehensive divestment strategy is not suitable for our Fund on financial grounds or our broader climate goals. This is despite the positive impression it would have on our own carbon footprint.


As set out in the Strategy, we are committed to supporting real-world carbon emission reduction, recognising that no company is insulated from the economic impact of extreme global warming. The Strategy acknowledges that both engagement and divestment are important components for managing fiduciary risk. These are considerations we know many of our investment managers will also be making on a day-to-day basis when determining risk to their investments.


We are committed to working with our partners and managers to engage with companies that are misaligned with the Paris Agreement. Commitments to divest unilaterally from fossil fuel producers only result in those holdings being consolidated by their top investors, as set out in a report from the Centre for Climate Crime and Climate Justice, so it is vital we maintain our voice against those investors that may have a shorter-term and less climate conscious view.


The Fund’s fourth climate report elsewhere on today’s agenda sets the key highlights of our progress, including a 38% reduction in carbon intensity of the Fund since 2019, but we still have a long way to go in support of real-world emissions reductions. We will continue to develop our approach in light of best practice and financial and legal advice to the Fund and will continue to consider these representations as part of any future review of the Net Zero Climate Strategy.


Again, I appreciate your thoughtful words to the Committee and representations on this important issue.”


Arising from discussion, the following points arose:


i.          A Member questioned if it was possible to quantify the success of the Fund’s engagement with companies in generating a move away from fossil fuel. It was reported that every quarter there were reports from partners, such as LGPS Central, the Local Authority Pension Fund Partnership, and LGIM monitoring the position. However, engagement was a long-term endeavour, and whilst gradual progress could be seen it was difficult to demonstrate quarter to quarter. It was noted that previous reports had included details of engagement and progress made with top emitters, on environment, social and governance issues. The Director undertook to provide some specific examples to Members after the meeting.


ii.          A Member queried if any of the Fund’s investments were with companies involved in arms production. The Director confirmed that managers had been contacted some time ago to try to quantify exposure through defence and aerospace markets.  However, this was difficult given there was no national definition as to what this included. Some funds, including LGIM (Legal and General Investment Management) and LGPS Central, excluded investments with companies involved in the manufacture and sale of controversial weapons, but this did not necessarily capture the entire defence sector which was much broader. The Director undertook to clarify the position and provide more information to Members after the meeting.


iii.          A Member highlighted that the Committee had set out its net zero targets and welcomed the fact that it had begun reporting on some of these metrics where possible, so that the Committee could begin to see what progress was being made.  It was emphasised that this would take time but that, as set out in the Funds’ Net Zero Carbon Strategy (NZCS), the Fund would be able to review and develop investment mandates to ensure further alignment with its NZCS. Examples of such decisions included the commitment to the Quinbrook Net Zero Infrastructure Power Fund, as well as Stafford Capital carbon offset fund, which was a sustainable forestry fund.

iv.          Another Member commented that there was a general movement that required pension committees to now face up to their moral responsibilities as well as their fiduciary duties and suggested that this was to be welcomed. The Director highlighted that the mandate set by the Funds agreed NZCS and by previous investment decisions made by this Committee and the Investment Sub-Committee had been clear in supporting this approach. However, a balancing act was necessary to weigh up the fiduciary duty owed against any potential negative impact of any investment.


The Chairman reminded Members who had strong personal or political views on ethical, environmental investment issues that they needed to mindful of the Committee’s Conflict of Interest Policy.




a.     That the updated report on Responsible Investing be noted.


b.     That the comments received from Ms. Zelter, Climate Action Leicester and Leicestershire be noted;


c.     That the Director of Corporate Resources be requested to:

                     i.            provide some specific examples to Members of how its engagement with companies was helping to secure a move away from fossil fuel;

                   ii.            clarify the position regarding the Fund’s investments with companies involved in the production of arms.


Supporting documents: